Category: Blog

Today I made a proposal for the form of CGT changes the Coalition government might introduce. As yet there are no government proposals, as I imagine they are thinking through how best to change it.

The Evening Standard expressed interest in the scheme I had outlined. I explained it to them and explained it was a contribution to the debate before legislation and before government proposals. How on earth they think this makes me a “rebel” I have no idea. There is currently no government proposal to rebel against. There does have to be proper debate of ideas and proposals before turning to draft legislation. Newspapers should grow up,and stop making divisions up.

If I were ever to lead a rebellion against a government proposal I would make that clear at the time of marshalling support, and brief the press accordingly.

Let me offer a little marriage guidance to the new Coalition. Tax is something Conservatives and Lib Dems could fall out over. It is, however, an accident that need not happen.

Deep in Lib Dem DNA is the Robin Hood principle – tax the rich and give to the poor. It is superfically popular, and gives believers a feeling of moral superiority.

Deep in Conservative DNA is the belief that society and the economy work better if you allow people to be successful and to pay their own bills. Conservatives do not see financial success as a crime which the state needs to punish.

These two have in the past come to blows over tax. So can we find a way through today?

The most important tax proposal to the Lib Dems is fortunately a tax cut. They want to take everyone earning less than £10,000 out of Income Tax. They claim this helps the poorest. It does not, as the poorest are on benefits and will suffer benefit withdrawal as they enjoy their tax cut.

However, the good news is that most Conservatives are keen cutters of Income Tax, and will happily accept Income Tax cuts through raising the threshold for the sake of the political marriage. One Income Tax cut can serve as well as another.

The problem comes with the other Lib Dem tax proposal, to partly pay for the first. They wish to increase Capital Gains Tax to 50% for the rich, and to higher rates for everyone else. This is anathema to most Conservatives.

So let’s go back to first principles. Although Mr Hood was a common armed robber, I do understand his hero status. I have always said during this crisis we need to tax the rich more, to help us out of the financial chaos Labour gave us.

The best way to tax the rich more is to cut tax rates. If we put up CGT on enterprise, business and investment, it will deter talent, send people abroad, put off new people with businesses coming here, help rich accountants and lawyers with schemes to avoid it. It will change people’s attitude to financial risk, at a time when we need people to venture more, not less.

Last night a group of MPs and peers worked into the night on how we might come up with a solution to the political problem facing the Coalition. The first thing we all agreed was there is a big difference between longer term capital gains on investments, and short term gains made by speculators. We can see the case for a gain made in less than a year being taxed as income, to assist the Treasury purists and the Lib Dem Robin Hoods.

The second thing we agreed was the old CGT regime when the rate was higher included generous reliefs to avoid taxing inflationary and longer term gains to excess. If the new regime is to have no such Indexation relief, and a much smaller tax free amount, then it needs to recognise the difference between a longer term and shorter term gain.

We ended up with the following proposal. Tax gains under one year at a person’s marginal Income rate – this should be no more than 40% but is temporarily 50% thanks to Labour’s last penal phase.

Exempt all gains of over five years from CGT altogether. These are long term investments which are good for the UK. This would make us more tax competitive.

Tax two year gains at 30%, three year gains at 20% and four year gains at 10%.

Robin Hood has the scalp of the market speculator. The UK is a more attractive place for anyone wanting to create jobs, provide houses, make other worthwhile investments. Long term savers for their families and for a rainy day could sleep easy in their beds. It would raise more revenue than the 40-50% scheme currently being mooted, over any reasonable time scale.

I had composed this headline in my mind when I heard on the radio that the government will announce its first cuts next week, following urgent review of the projects and plans the last government approved for spending in the first four months of this year. They are right to do so.

Sterling has devalued by 5% against the dollar since the election. The markets are not in panic, but they are making their point. The government needs to start reducing spending early next week, and to show they are serious about getting on top of the deficit.

There will be some easy cuts to make from the political projects Labour waived through in the last few days in office. If there are cancellation costs, then pay them. It will be much cheaper in the long run, as the state does not have the money to pay all the bills.

The government does also intend to publish its own figures for the off balance sheet items. The debate on this site has seen some suggesting it will be too much to tell us the truth. I think it essential they tell us the truth about the financial position. Some of us have been telling the public to add in large extra sums to the claimed figures for public debt, so it would be silly for the government to think that by refusing to acknowledge it they could fool the markets.

Mr Hammond Transport Secretary) promised to end the war on motorists. That is a great idea for the day job.

He should leave the BA dispute to the management and Unions, and to ACAS when they need professional arbitration or neutral chairmanship.

If he wants something else to do he could see how his Regulator of the skies proposes to keep us safe and keep the planes flying, as there are disputes again over airport closures.

The “black holes” now being revealed should come as no surprise to readers of this site. I have set out many times how the true indebtedness of the Uk state is between £3 trillion and £4.5 trillion depending on how you account for bank liabilities, on normal company accounting. (PPP,PFI, unfunded public sector employee pensions, nationalised banks and bad debt guarantees). I first challenged the old government’s rosy portrait in the Economic Policy Review, then augmented the figures as they borrowed more and bought up bank liabilities.

The new government is rightly going to seek independent judgement on the extent of off balance sheet liabilities. We are also learning of the rush to spend and commit to big contracts in the dying days of the Labour government. What else did you think my UK PLC CEO letters were about? We knew it was happening.

I went out on the doorsteps yesterday, resuming my Saturday morning roving doorstep surgeries.

I was pleasantly surprised by the mood. Most who said they were Conservatives were pleased the Labour government had gone. They ranged from disappointed that we had to be in alliance with Lib Dems to quite positive about it, but all accepted it had to happen. Very few people ever confess to being Lib Dems when I call, but those that did were more positive about the Coalition than the average Conservative. Non alligned voters and non voters – people who did not volunteer their inclinations – seemed relaxed or disinterested .

Today’s polls confirm this, although they say that Lib Dems are less in favour of the arrangement than Conservatives. The government overall has around two thirds support, more than the voting support for the two founder parties. Labour has picked up support at the expense of the Lib Dems. That may be the result of the Coaliton. I suspect it is more likely to be the result of the departure of Mr Brown. Pro European Lib Dems would welcome the more Euro friendly and voter friendly Mr Miliband, the current front runner for Leader.

In the first week of the Coalition government, whilst their minds were elsewhere, Labour’s policy of devaluation and higher prices continued. Sterling fell against the dollar and other important currencies like the yen. The Coalition government reached agreements which included some increases in public spending which were specific, but has yet to spell out how much further and faster it plans to go in deficit reduction.

There are three main options to change course on inflation and devaluation. Most helpful would be an early statement of the new trajectory for deficit reduction whilst they work out the detailed spending plans. The bigger the cut in the deficit this year the better it will be for seeing off a falling pound and higher prices.

Secondly, they could announce they will not be resuming the Labour policy of money printing to provide cheap finance for a public sector spending led recovery. This policy clearly is not working and is unaffordable.

Thirdly, they could raise official interest rates to bring them more into line with private sector reality and borrowing costs.

I would recommend doing numbers one and two immediately.

The favourable reaction to the $1 trillion package of loans and guarantees for Euroland states in difficulty did not last long. Yesterday markets fell sharply again on renewed worries that Euroland will not grow quickly enough or in places at all. A failure to grow will keep tax revenues depressed and social spending high, leaving deficits too large. Markets fear a European vicious circle.

So what should the EU do? It should change policy. Instead of seeing higher taxes and more regulations as the answer to everything it should see them as part of the problem. Instead of seeing government action as the outward manifestation of social solidarity, it should see the need for more private action to employ and serve the neighbours as proof of true social solidarity.

The EU should meet to achieve two big changes of direction. Its first task, as stern budget superviser urging member states to rein in deficits, should be to make dramatic reductions in the EU budget. From each member states point of view the money spent on EU matters and projects is of more marginal importance than say the money spent on domestic education and health care. The EU should take the lead to in cutting spending to relieve the budgetary pressures. Spending cuts should start abroad. The EU’s sensible requirement for controlled budget deficits should make them lead by example.

Its second task should be to draw up a big Repeal Directive, removing from the law codes many of those fiddling and costly interventions in business life which have led to the export of so many jobs from the EU to less regulated places like China and India.

Euroland needs more private sector jobs. It needs to export more and import less. EU rules and taxes get in the way of that.

The UK coalition government also needs to follow policies which promote a faster private sector recovery.

This morning we learn the new Foreign Secretary has been booked to go to Washington, and we are assured he will shortly thereafter be visiting Paris and Berlin.

If they wanted to show they understood how the world is changing, Foreign Office officials would buy him a ticket from Washington to Delhi,and then on to Beijing.

The UK needs to build a deeper and stronger friendship with India, the world’s largest democracy. It must be good news for the UK that India has a fast growing market of 1200 million people, in a country where English is the second language of many.

The Uk needs a good relationship with China, its bank manager and supplier of so many goods. As the Coalition government understandably plans to take time to cut the deficit it needs to know the views of the world’s main creditor who will be needed to buy some of the debt.

Economic power is shifting and will shift dramatically. There are 300 million consumers in Europe, in a very slow growing area of the world with substantial debt and currency problems. There are 2500 million consumers in India and China, with a combined growth rate of almost 10% per annum. China has $2 trillion in the bank. The UK’s commercial future lies more in Asia. If we are to earn our present living standards and grow them faster we need to go east.

Whilst the new Coalition government in the UK considers its options for budget reductions next month, many EU countries are revisiting their large public sectors and taking action to bring down costs.

Cutting Ministerial salaries is popular. The 5% UK cut is similar to the cuts in Portugal. Spain has cut Cabinet salaries by 15% and Romania and Greece have also put through pay cuts. Several countries have widened the pay cuts to include senior officials. France has announced a 10% cut in state operating costs, and has frozen total spending save pensions and interest payments. Portugal has stopped certain high profile capital projects. Greece is running a pay freeze for the public sector until 2014 and has cut public sector allowances and bonuses. Spanish civil servants are experiencing a 5% pay cut.

Action is also being taken on pensions. In the Netherlands the retirement age is being raised to 67. Greece is putting the female retirement age up to 65 from 60. Spain is freezing pensions. Romania is putting through benefit cuts.

The profiles for deficit reduction include:

Borrowing as a percentage of National Income

Spain 11.2% 2009 9.3% 2010 6% 2011 3% 2013

Greece 13.6% 2009 8.1% 2010 7.6% 2011

Portugal 9.4% 2009 7.3% 2010 4.6% 2011

The problem for many of these countries is that stuck in the Euro zone without the ability to print money and to devalue, their private sector growth rates may remain poor. Some of them have added to the difficulty by putting through large tax increases. Portugal has imposed an extra 2.5% tax on profits, more than 1% extra on Income Tax and raised the top rate of VAT to 21%. Greece has put VAT up to 23% from 19% and increased Excise duties by 10%. Even Germany, with a lower deficit, has announced no planned tax cuts after all.

More states should be looking for things the government need not be doing, and should be doing more to cut the costs of the government overhead. The EU could make a contribution to getting member states’ budget deficits down by cutting its own financial demands on its members.

Higher taxes on consumption where a country is in balance of payments deficit is less harmful than extra taxes on work and investment. It is all part of the process of cutting living standards where a country has been living beyond its means for too long, relying on borrowed money. In the Euro direct cuts in living standards by cutting pay is more common. In the US and UK cutting living standards by allowing the currency to fall is more common. Sterling fell to $1.46 yesterday, reminding us the markets are not going to wait too long before wanting proof that there is a new strong grip on the nation’s finances.